Accounting & Tax

IAS Will Change U.S. Accounting Rules

Is it time for the U.S. to scrap goodwill, pooling, and GAAP?
Ed ZwirnFebruary 6, 2001

Accounting standards the world over are about to get a facelift, and financial executives in the U.S. may have to make a big adjustment.

The various national systems throughout the world, such as the U.S. Generally Accepted Accounting Principles (GAAP), may soon be swept away in favor of a unified, global International Accounting Standard (IAS).

Sir David Tweedie, the British citizen who heads the new International Accounting Standards Board, says CFOs, auditors, and others crunching the numbers for U.S. companies should expect to change much of the way they do business, and relatively quickly.

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The argument in favor of rapid action on this front is fairly straightforward.

Given globalization of the economy, truly international accounting standards are needed to increase transparency and spur cross-border investment.

Tweedie, whose 14- member committee was created Jan. 25 and will hold its first meeting in April, says he expects accounting standards of the major world economies to progress toward agreement within the next three years, and to reach complete harmony within five.

In order for that to happen, U.S. accounting standards must undergo some heavy revisions in a relatively short time.

General Approach Differs Greatly

The issue affects both the general approach and specific applications.

IAS, the accounting system that will be used as a base for the new set of globally effective standards, differs greatly from U.S. GAAP in that it relies much more heavily on “general principals” than specific instructions.

Tweedie, a former technical partner at KPMG Peat Marwick McLintock and U.K. and Irish representative to the International Auditing Practices Committee, opposes using the U.S. GAAP’s detailed approach in constructing the new standards.

“If you want a standard to deal with 80 percent of the problems, you could do that in about 60 pages,” he said at a recent press conference given by Tweedie and former U.S. Federal Reserve Chairman Paul Volcker. “If you want to deal with 95 percent, it would take another 200 pages.”

General, But Not Lower, Standards

While the IASB head stands in favor of the “60- page” approach, many U.S.-based critics have said that this would represent a watering down of the exacting nature of local GAAP.

Tweedie, however, disputes this argument.

“We’ve done this in the U.K. and there was no problem,” he says, disparaging “when [accountants] start looking at ‘what happens if this occurs’ and ‘what happens if that occurs.’” He also argues that the more specific U.S. standards are open to subterfuge.

“If you say ‘if you do A then B you have C,’ the next thing some accountant will do is say ‘let’s do D,’” Tweedie says.

Down To Specifics

Tweedie also notes that specific aspects of U.S. accounting must change if the goal of international standards is to be met.

Generally, these have to do with methods of accounting for mergers and other business combinations, such as provisions for “goodwill” amortization and “pooling” of assets — accounting methods FASB has already begun to revise.

“If you buy a company for $1 billion, the bit that’s left [after accounting for all tangible assets] is goodwill,” he says.

The point of divergence here between U.S. and European standards is that goodwill in the U.S. is amortized and decreased on a balance sheet even in a case in which “the company is actually rising in value,” Tweedie says.

The new approach, already proposed by FASB, would require actual impairment of a brand name or company reputation before goodwill could be decreased in value.

Tweedie also calls for the elimination of “pooling,” a U.S. accounting practice that allows firms to be essentially combined for reporting purposes without taking tax consequences into account.

The IASB chairman says that only about “1 percent pooling [exists] in the U.K.,” and notes that pooling is also likely to undergo revision in the U.S., a fact which makes it “a good candidate for harmonization.”

Is Everyone Wrong?

In addition, there are “areas that, internationally, none of us have got right,” Tweedie says.

The chairman says that the so-called G4+1, which refers to the U.S., the U.K., Canada, and Australia and the International Accounting Standards Committee (IASC), needs quickly to revamp approaches to transactions involving derivatives, leasing, and stock.

He specifically referred to FASB 133, which requires many derivative transactions to be posted directly to profit/loss statements rather than reported as footnotes as “a step towards” the correct approach, predicting that FASB will shortly come out with “a revision of this that’s a further step in the right direction.”

U.S. Reaction Muted

In the meantime, while U.S. regulatory and standards-setting bodies are all on the record in favor of the IAS convergence effort, reaction has so far been muted in the absence of official, detailed proposals.

For example, Herbert Finkston, director of international technical services for the American Institute of Certified Public Accountants, is withholding his opinion until he sees the actual proposals.

But he does voice some skepticism as to both the timing and the scope of the project, agreeing when asked if he thought Tweedie’s timeframe “ambitious.”

“But that’s a personal view,” Finkston was quick to add.

Until he sees the proposals, he’ll defer judgement on Tweedie’s call for more-general and less-lengthy standards.

“First, we would like to see the 60 pages that cover 80 percent of the situations,” he notes.

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